The State Policy Network Blog points out the unintended effect of New Jersey\’s newly increased cigarette tax – it actually reduces revenue to the state. SPN points to an Asbury Park Press column by Gregg Edwards, which says:
To support the Fiscal Year 2007 state budget, Gov. Corzine successfully proposed increasing the cigarette tax by 17.5 cents, from $2.40 to 2.575 per pack. It was the fourth tax increase in a six-year period and it made New Jersey\’s tax the highest state tax in the nation.
Here was the result: In FY 2006, the cigarette tax raised more than $787 million. In FY 2007 – after it was hiked by almost 7 percent – the tax raised only $764 million, or $23 million less than the previous year.
Some of the sales decline was due to smokers giving up an expensive habit, but that can\’t explain its magnitude. Many smokers don\’t buy cigarettes from New Jersey retailers. Instead, some purchase cigarettes in the states that border New Jersey, all of which have lower cigarette prices. While New Jersey\’s sales are plummeting, Delaware\’s are increasing. And it\’s certainly not the case that more Delaware residents are becoming smokers. Also, some smokers make purchases via the Internet. Others even buy in the black market, which owes its very existence to New Jersey\’s steep tax.
So higher taxes means less revenue to the state – and while some of the reduction can be attributed to people quitting smoking, much of it likely means people are getting their cigarettes from other sources. In fact, recent research suggests that higher cigarette taxes don\’t, in fact, dissuade low-income smokers from quitting.
Of course, Governor Doyle\’s proposed per-pack cigarette tax increase of $1.25 far exceeds the new 17.5 cent tax in New Jersey. So it will take a lot more people quitting or purchasing their cigarettes from out of state or online to offset the tax increase. However, this effect supports Deb Jordahl\’s WPRI Commentary from last week, which demonstrates the paradox of state government relying on a new tax that is intended to keep people from a behavior that is needed to keep collecting the tax.